Mar 18, 2007

（Translated by freelance Chinese translator li – English to Chinese or Chinese to English translation services）English-ChineseSource:Study: CEO, Outsiders Lead Financial Statement FraudMarch 8, 2007 (SmartPros) -- The overrides of internal controls leading to financial statement fraud is typically caused by a fraud network led by the CEO and aided by outsiders, according to a new study of financial statement fraud.

The study by the nonprofit Institute for Fraud Prevention (IFP), a consortium of universities dedicated to researching the causes of fraud and how to reduce it, found that these fraud networks cause extremely large losses that are far greater when the outside audit firm is alleged to have aided the fraud.

Robert Tillman and Michael Indergaard of St. John’s University in New York, working under an IFP grant, undertook a review of 834 firms that filed financial restatements between 1997 and 2002. By examining these companies, along with any class action lawsuits and SEC proceedings taken against them, they were able to extrapolate several trends in financial statement fraud.

Several of the study's conclusions corroborate those from other research, including that investor losses from financial statement fraud are of devastating proportions and that the most expensive frauds are almost invariably led by controlling persons, typically the CEO. (Criminologists refer to them as "control frauds.")

The CEO normally includes the CFO in the fraud network. Restatements are more common in so-called New Economy industries, such as information technology, energy trading, and telecommunications. However, the data also revealed some previously under-explored facets of financial statement fraud.

Paramount to the findings was evidence that these schemes are rarely solitary endeavors. The average number of parties connected with the alleged fraud cases studied was 7.2. Additionally, in over half of the schemes examined, a company other than the restating organization -- usually an investment bank, auditing firm, or colluding business partner -- was implicated as a participant.

One of the striking findings was that average shareholder losses were more than twice as large in cases in which it was alleged that the outside audit firm aided the control fraud.

The authors of the study recommended continued oversight of the financial reporting process and the maintenance of policies that require accountability on the part of senior managers, board members and auditors. The researchers opposes measures designed to limit the liability of auditing firms.